(Adds comment from Lynn Tilton, background)
Sept 27 (Reuters) - The U.S. Securities and Exchange Commission suffered a defeat on Wednesday, as a judge said it failed to prove private equity fund manager Lynn Tilton defrauded investors by hiding the poor performance of assets underlying three debt funds.
SEC Administrative Law Judge Carol Fox Foelak dismissed the charges against Tilton, the founder of New York-based Patriarch Partners who is known as the Diva of Distressed for taking over troubled companies.
The SEC's enforcement division in 2015 accused Tilton of defrauding investors in the three so-called Zohar collateralized loan obligation funds, which raised $2.5 billion to make loans to distressed companies.
At trial, the SEC alleged Tilton misled investors by directing the valuations of assets underlying the Zohar funds remain unchanged despite their poor performance in order to avoid the loss of $200 million in management fees.
But Foelak ruled that while Tilton and Patriach did not make it easy for her sophisticated investors to find information, "they also did not conceal - omit to state - material information."
The ruling marked a major setback for the SEC's enforcement division, which had sought to force Tilton and Patriarch Partners to pay at least $200 million and be barred from the securities industry.
"I am heartened to finally be able to put to rest the rumors and innuendo that have cast a dark shadow on me and my business for so long," Tilton said in a statement.
An SEC spokeswoman declined to comment.
Known for her flashy outfits, Tilton has portrayed herself as a hard-charging female executive in a male-dominated field. In 2000, she founded Patriarch, which counts among its portfolio companies MD Helicopters.
Wednesday's ruling came after a trial that ended in November. The trial took place after Tilton unsuccessfully sued to block what she called an unconstitutional proceeding before an SEC in-house judge.
Her case was one of several where defendants objected to the SEC's use of administrative proceedings, which became more common after the 2010 Dodd-Frank law gave the agency the power to bring more cases in-house.
Randy Mastro, a lawyer for Tilton, in an interview said the ruling vindicated his client.
"We have said all along that Lynn Tilton was innocent of these charges, that she was falsely accused and that we would prove it at trial," he said. "Now we've done just that." (Reporting by Nate Raymond in Boston; Editing by Clive McKeef and Cynthia Osterman)